What's on the books for 2010
As the US, bastion of free market capital, pumps another $3.8bn into the car loans giant GMAC, Stephen Foley reports on the unfinished business of the crunch
Thursday 31 December 2009
The bailouts are not over – not in the US, at least. The Treasury department is writing another multi-billion-dollar cheque, this time to GMAC Financial Services, the auto loans company that was once part of General Motors.
Like so many, GMAC came to the brink of insolvency because of a disastrous diversification into sub-prime mortgage lending. It provides vital loans that allow General Motors dealerships to buy in stock and to fund customer purchases, so the biggest car company in the country could be crippled if GMAC goes down. That in turn would be a disaster for jobs and could reignite the recession. And so the bailout logic asserts itself, and another payment of about $3.8bn (£2.36bn) is on its way, on top of the $12.5bn GMAC has already received from the government so far.
The details were announced last night alongside a wholesale recapitalisation of GMAC's mortgage operations. The company posted a quarterly loss of $767m last month, and has been unable to find private sector investors to fill all of the $11.5bn capital hole identified by the Federal Reserve "stress test" of its operations earlier this year.
"Treasury is in discussions with GMAC to ensure that its capital needs, as determined by the stress tests, are met," a US government spokesman said yesterday. The government's stake in the company will increase from 35 to 56 per cent.
The latest taxpayer infusion is actually smaller than observers of GMAC's woes had been fearing, since it has been able to plump up its balance sheet in other ways. It rebranded its retail bank as Ally and has been luring depositors with high interest rates and with ads that take a sideswipe at the hidden charges of its rivals.
The bailout cash will come from the Troubled Asset Relief Program (Tarp), the $700bn fund created by Congress at the height of the financial panic last year to rescue the banking system. The Tarp has been the central plank in the US government's extraordinary effort to prop up the economy in the face of crisis, but it is by no means the only plank. While some $175bn has now been repaid to the taxpayer, and the sense of panic has abated, 2009 ends as it began with large parts of the US economy and many of its big corporations still operating as clients or outright subsidiaries of the US Government.
In a country that prides itself as a beacon of free market capitalism, where all of the government aid has been professed as a regrettable and temporary necessity, 2010 rolls in with plenty of unfinished business to be done.
Fannie Mae and Freddie Mac
The two mortgage finance giants, which owned or guaranteed half of all US mortgages, were nationalised last year after plunging into the red. While the original plan was to shrink them out of existence, they are now more important to the housing market than ever. As well as underwriting a majority of new loans, they are also encouraging lenders to modify the terms of existing mortgages so that struggling borrowers can stay in their homes. The pair have eaten $112bn of taxpayer funds so far, and on Christmas Eve the Treasury lifted the $400bn cap on the total amount of bailout money they can take.
The car industry
The US Government owns 60 per cent of General Motors, the biggest US car maker, and just under 10 per cent of Chrysler, the country's third biggest, after funding their emergence from bankruptcy this year. Restoring these rusty giants to health will take years, and while a $3bn US government scheme to encourage drivers to trade up to new models has helped boost sales over the summer, the real test is whether new management can profitably build exciting new models as the economy recovers. The Government could sell its stake in Chrysler to Fiat, which is managing its turnaround, but GM has signalled it could delay its return to the stock market, originally pencilled in for late 2010.
The bank bailout
Might the US taxpayer end up in profit? It is a little early to say, because the Treasury doesn't want to let go of the reins of the economy too soon, just in case growth falters next year and sends the banking system back into trouble. The Tarp had been set to expire at the end of this year, but is being extended till October. Over $200bn of the original $700bn remains unspent, so the question is whether the Treasury uses that money for economic stimulus, or just hangs on to it in case of more GMACs. Meanwhile, most of the largest banks have paid back their bailout billions, but that still leaves hundreds more regional institutions that will be paying back loans for some time.
The largest bank still in hock to the US Government is Citigroup, which was twice bailed out with taxpayer cash last year. It paid back $20bn of its $45bn bailout this month, but the rest is proving trickier. The remaining $25bn is held by the Treasury in the form of Citigroup shares, and it scrapped a plan to start selling them in the market after failing to find buyers at a good price. Whether it turns a profit will depend on how quickly and successfully Citigroup sells off the one-third of its assets that it has decided are "non-core". Before then, and in the absence of a Congressional deal to reform the way Wall Street deals with failing institutions, Citigroup remains "too big to fail".
Nowhere are the running battles over government intervention in the private sector being waged more viciously than at AIG, which was handed a $180bn lifeline on its nationalisation in September 2008. Kenneth Feinberg, the "pay tsar" appointed by the Obama administration, has capped salaries for 100 top earners, but he made exceptions after managers threatened to leave for more lucrative jobs in the parts of Wall Street that have recovered. AIG is still struggling to get a handle on the massive derivatives portfolio that got it into trouble in the first place, and to sell off parts of its traditional insurance business.
Emergency market interventions
Perhaps some of the trickiest disentangling of government support for the economy will have to be practised in 2010 by the Federal Reserve, which instigated a slew of emergency schemes to prop up individual parts of the credit markets and engaged in "quantitative easing" to push interest rates lower. The US central bank has printed money to buy up mortgage securities and government debt, swelling its balance sheet from less than $1 trillion before the crisis to more than $2trn now. It has been testing a variety of ways to recall that money when the economy strengthens, and has promised that all its special lending facilities will expire on schedule over the next few months.
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